The Dodd-Frank Wall Street Reform and Consumer Protection Act

What is the Dodd-Frank Wall Street Reform and Consumer Protection Act?

Signed into law in 2010, the Dodd-Frank Act is a sweeping legislation package that strengthens the oversight and supervision of financial institutions, especially banks and insurance companies. It was created in response to the financial crisis of 2008-2009, which was precipitated by the proliferation of complex and little-understood financial instruments that caused enormous losses in investment portfolios globally.

What is the Financial Stability Oversight Council?

The FSOC was created under Dodd-Frank to oversee financial institutions. It is meant to identify risks to U.S. financial stability that may arise from ongoing activities of large, interconnected financial companies, as well as from outside the financial services marketplace. One of the primary responsibilities of the FSOC is the designation of systemically important financial institutions (SIFI) that would pose an excessive risk to the economy at large were they to fail.

Which kinds of alternative financial institutions are now subject to the SEC’s authority under Dodd-Frank but previously were not?

The SEC now requires hedge funds that manage more than $100 million to register as investment advisers and also requires registration of municipal financial advisers, swap advisers and investment brokers. Under Dodd-Frank, the SEC was also granted authority to enforce rules established by the Municipal Securities Rulemaking Board, while the Act raised the threshold for investment advisers subject to federal regulation from $25 million to $100 million. Many private fund advisers are now required to register with the SEC, with exemptions made for (1) those that advise solely venture capital funds; (2) advisers solely to private funds with less than $150 million in assets under management in the U.S. and (3) certain foreign advisers without a place of business in the U.S.

What is the Volcker Rule and is it meant to accomplish?

The Volcker Rule, provided for in Section 619, prohibits insured depository institutions and companies affiliated with insured depository institutions (banking entities) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The rules also impose limits on banks’ investments in, and other relationships with, hedge funds or private equity funds.

What does Dodd-Frank do to better regulate financial derivatives?

Dodd-Frank mandates that the riskiest derivatives, including credit default swaps, be regulated by the SEC or the Commodity Futures Trading Commission (CFTC). This ensures that excessive risk-taking can be identified and brought to policy-makers' attention before a major crisis occurs. The law also requires that a clearinghouse, which resembles a stock exchange, be set up where such derivative trades can be transacted in public. But Dodd-Frank leaves it up to the regulators to determine exactly the best way to put this into place, which has led to a series of studies and international negotiations.

Amid the current political hunger for deregulation, Janet Yellen, chairman of the Board of Governors of the Federal Reserve, recently delivered an impassioned defense of the current regulatory environment. Don’t drop the ball now, she warned.

The Financial CHOICE Act, a more than 600-page bill to repeal and repace much of the Dodd-Frank Act, has passed in the House of Representatives with a party-line vote of 233 to 186. It now moves into the far greater challenge of passage in the Senate.